Mexico Lures Bigger Bets From Latin America Currency Fund

Mexico’s currency posted the smallest decline against the dollar in the past 12 months among the six most-traded Latin American currencies, according to data compiled by Bloomberg. Photographer: Susana Gonzalez/Bloomberg

March 28 (Bloomberg) -- Latin America’s only local-currency
corporate-debt fund, run by Chile’s Moneda Asset Management SA,
increased its exposure to Mexico on a bet the country’s economy
will outperform the region.

The fund has about 40 percent of its $380 million of
holdings invested in corporate bonds and loans denominated in
Mexican pesos, up from 30 percent at the beginning of last year,
Javier Montero, one of the fund’s managers, said in an interview
at the company’s headquarters in Santiago. Twenty-five percent
of the fund is invested in corporate debt denominated in
Brazilian reais and 12 percent in Colombian pesos.

Mexico’s currency posted the smallest decline against the
dollar in the past 12 months among the six most-traded Latin
American currencies, according to data compiled by Bloomberg. It
fell 5.7 percent through yesterday, compared with declines of
7.1 percent for the Colombian peso, 11 percent for the Brazilian
real and 14 percent for the Chilean Peso. Mexico’s currency is
less affected by falling commodity prices than those of other
Latin American nations, and that should help increase returns,
Montero said.

“Mexico has good prospects with its new president,
structural reforms on the way, a high dependency on the economy
of the United States, which is growing, and productivity,”
Montero said. “The risk is in the small print of the reforms
for Mexico, how they are implemented and when they will bring
benefits.”

Constitutional Amendments

Mexico has been changing laws to open the oil industry to
new investors and allow private companies to compete with state-owned firms on exploration projects and the installation of new
electrical capacity. In his first full year in office, President
Enrique Pena Nieto signed at least 10 constitutional amendments,
including one aimed at boosting competition in the
telecommunications industry.

As part of a revamp of the nation’s bankruptcy laws, Mexico
also eliminated a loophole that had allowed companies to dictate
restructuring terms to investors.

A reduction in the U.S. Federal Reserve’s stimulus program
and the economic slowdown in China are “the main threats for
other Latin American nations,” according to Montero.

Moneda, with $5 billion under management, said its Latin
American Local Currency Debt fund, created in 2009, had a net
inflow of $80 million last year. A second fund, the Moneda Latin
America Debt fund, which invests in high-yield dollar bonds, had
$200 million in inflows, which brought total assets at $1.4
billion, he said. That fund posted the best performance among
emerging-market funds in the past 10 years, data compiled by
Bloomberg show.

Average Returns

The local currency fund had a negative return of 4.5
percent in dollar terms last year, because of the depreciation
of Latin American currencies, he said. Since its creation, the
fund returned 9.9 percent a year on average in dollar terms and
11 percent in Chilean pesos, he said.

The high-yield dollar-bond fund returned 13.4 percent on an
annual basis in the past 10 years, compared with the 9.1 percent
gain for the Bank of America Merrill Lynch High-Yield Latin
American Emerging Markets Corporate Plus Index. Last year, it
returned 13.4 percent, while the BofA benchmark fell 7 percent
after defaults such as OGX Petroleo e Gas Participacoes SA, now
called Oleo e Gas Participacoes SA. The oil and gas company had
$3.6 billion in international bonds, the biggest ever corporate
default in Latin America.

High Yield

Moneda’s Latin America high-yield fund can have as much as
15 percent of its total assets invested in distressed bonds,
Montero said. “High-yield companies can eventually default,”
he said.

“Historically the minimum price of a bond is on average
between 90 days before and 90 days after the company falls into
non-payment,” he said, adding that Moneda sometimes buys
distressed bonds in this period.